We learned in Dr. Simon's lecture that there are numerous different ratios that can be calculated to tell different aspects about the company's health. Would the relative importance of each ratio be swayed by how big the company is? For example, when Microsoft has a "bad year" and runs a deficit, or close to one, nobody seems to bat an eye. As a company grows, what ratios do you see becoming more important? Do ratios start to portray a different aspect about the company?
I talked about this in another forum post. A bad year doesn't matter for big companies because they can afford risks that smaller companies can't. For example, Tesla is having a worse year compared to last year but I don't believe that people are too worried. Tesla is diversifying their products and trying to meet a high demand. That demand isn't going any time soon. The ratios may be temporarily bad as companies try to meet demand and have to raise funds and allocate resources to ensure their product gets out. That or they may need it to create new products. In your example, Microsoft has had bad years, but it's enough of a tech giant that no one is bothered by it because they know that it will bounce back due to its diverse portfolio and its hold on the market.
I agree with you that ratio is an indicator to gauge how good or bad the company is based on financial history, However it is a bit different for big companies. typically when they analyze big company they look at it from 3 to 5 years. For another example, you can look Super Micro Computer Inc. They did a lot better for the year of 2016 and 2017 than 2018. In my opinion, people still support them and expect a better future for the company. Also, It is important to sustain in the market as they are the only competitor to Intel and it is not good for the market to be controlled by one company only that's why a lot of company helps Super micro to service. we learned today how to do basic calculations and look into a company financial profile so you can refer to SMCI online to check the financials for the company.
The measure of a company success go beyond the hard cash it generates as reflected in corporate dividends. Financial ratios provide a means to understand the relationship between the accounts and figures represented in financial statements. Business ratios address key areas of business performance, including efficiency, profitability, and solvency. The small business owner can use the ratio to evaluate potential operational issues as well as gauge the impact of these issues possible solutions on the company net profit. Comparing the ratios from one accounting period to another also can highlight an improvement or decline in performance.
I agree with the comments about a bad ratio not being as significant in a large company. However, I think the ratios could be a good indication of trends occurring in a big company. For example, if they see a ratio consistently not good over a few periods, it could be used to evaluate where problems are occurring and what needs to be done in order to start helping the financials of the company.
Like many of you said before me, it is not seen as a horrible things or a sign to be worried when a large company suffers from a bad quarter or a bad year. This is because due to the overall wealth of these companies, they can afford to take risks and lose some money, knowing that the profits will come back. However, for a small company that even in a "good" quarter where they are making money is living on the edge because of a lack of revenue, or attempts to expand, one bad year can mean serious problems and can even lead to bankruptcy. As far as good ratios to analyze the success of large companies, this could be things such as Gross Profit Margin, or Earnings per Share as it better displays the long term growth of the company.
Depending on the company's objectives, size, the field of engagement, I believe the measure of success should be altered. For small companies, one mistake could mean the end of the company's life or it will take them a lot longer to recover from a loss. Whereas a large company could be in bad years and still come back eventually. Also, larger companies usually are not as affected by the change in the country's economy. Depending on the field the method used to determine the successes is different and this method should be all different per field. Also, if the objective of the companies is to help students in third world countries these numbers are not necessarily tied to financial ratios. In addition, a lot of financial ratios should be geared more towards the investor and stakeholders. Other customers should focus more on the products the company offers any feedback related to those values.
In general, I believe each ratio is important to those analyzing the company from within as the company strives to reach ratios that indicate positive growth and profit. On the contrary, while assessing the health of a large corporation such as Microsoft or Apple as an outsider some ratios seem to be more important than others. Personally, I believe ratios that take into consideration factors relating to a company’s stock performance, such as earnings per share or price per earnings are of more importance for large publicly traded corporations. The reason I believe these are of greater importance is because they indicate investor confidence in the company. For example, some large corporations could report little to no profits and still have high stock prices because investors may believe in the company pipeline for the future. Some other important ratios include liquidity ratios because they can be an indicator of how well a company can withstand quarters in which either a loss or little to no profit was recorded. For example, a company with little cash on hand may not be able to withstand a quarterly loss unlike a company such as Apple. Overall, the health of larger publicly traded companies is typically assessed by investor confidence in the company and their ability to withstand quarterly losses.
Ratios are very important in establishing industry financial standards and norms. Generally, it is important to note what industry your company is residing in. Some industries just are not high margin businesses, such as grocery stores, auto dealerships and gas stations. Although pharmaceuticals and medical manufacturing can be lucrative, the home health and nursing home businesses typically do not generate high margins, which is why many of the larger companies try to achieve substantial economies of scale by acquiring and/or building a slew of facilities or branches.
In terms of ratios, my favorite is the Current Ratio (Current Assets/Current Liabilities), because it gives a clear snapshot of a company's access to cash and having what the industry calls liquidity. Basically, can this business go out and buy something it needs in a crunch? If COVID-19 hits, is the company doomed, if it is cash poor? To me, the current ratio can be directly tied the condition of the business, regardless of the industry.
Being in healthcare and having to deal with insurers, I have come to accept delays in accounts receivables that you can't control, despite electronic health records and electronic bill submission. Inventory turnover was also not much a concern to me, since, historically, my focus in healthcare focus was services, rather than devices.
I think when you get into giant companies such as Microsoft the risks behind these, "bad years" and, "bad ratios" reduce. They are so large and continue to make large amounts of money that even a drop in such shouldn't really impact them extremely. It might slightly if this ratio is bad for multiple years or if the company begins to lose its grip on the power it has, but I do not believe that happens very often. At least not in large companies.
Smaller companies are certainly at a much higher risk. If their revenue is lower then I feel like even one bad year could really hurt them, especially if the company is not very old or not very solidified in their chosen field.
I do agree with the comments stating that having a bad year in for a well-established company doesn't really affect the companies reputation that much. There are some uncontrollable events the company could go through that would affect the companies overall performance however well established companies bounce back from poor to well performance faster than smaller comapnies
Ratio importance depends on the company type (what they do) , it gives indications about the health of the business and how it is growing. for example, doing an inventory turns for barbershop business make no seance. Bad ratio can effect the company but that also depend on the ratio, the numbers they had and if it only a bad year in compare to other years or it is Really really a bad year.
While I agree with many of y'alls comments, the common theme I've seen is that ratios are dependent on company stage. What I mean by this is that its a game of large vs small perspective.
In the beginning, small companies often keep a close eye on liquidity ratios to make sure they can meet short-term obligations. As they grow, the focus shifts to efficiency ratios for smart resource management. Profitability ratios become more important for long-term sustainability, while keeping a check on leverage ratios helps mitigate risks.
For bigger players like Microsoft, the game changes a bit. While liquidity is still crucial, the main goal might become optimizing resource use. Profitability stays a top priority, and market ratios, such as the P/E ratio, play a big role in understanding market sentiment on a larger scale. Established companies also draw attention to dividend payouts, a scrutiny not as prominent for smaller companies that might prefer to reinvest profits for growth.
It's like a financial journey—starting with survival and growth in the early stages and transitioning to stability, efficiency, and delivering value to shareholders as the company matures. Each ratio is like a chapter in a company's story, and decoding it requires understanding the company's size and stage in the business lifecycle.
In terms of stakeholder interest and general outsider perspective on a company, larger more well-known companies can afford to have a year with a poor ratio for numerous reasons. First, they often have a long-standing history of being a reliable company. Even if Microsoft has one poor year, it is reasonable to assume (based on their history) that they are developing new products that will generate cashflow. Second, the news regarding this company is very public and the products they are developing are often announced. So, if people know that Microsoft is developing a new laptop, they will consider the future gain rather than the previous poor ratio. Smaller companies cannot afford to have the same luxury of having a poor ratio because they do not have a reputation that allows others to assume that they will bounce-back. Thus, smaller companies are usually more risk-averse as they try to always have positive ratios. Does this student or slow down potential development? Are small companies more concerned on having a positive financial record rather than taking potentially beneficial risks in development?
Different financial ratios can be used to assess various aspects of a company's health, as was explained in Dr. Simon's presentation. The size and reputation of the organization in question can affect how important each ratio is. Investors and analysts may not be overly concerned about short-term financial setbacks or even deficits for huge, well-established companies like Microsoft because of their sizeable reserves, multiple revenue sources, and track record of resiliency. Liquidity ratios, which are essential for new businesses and smaller organizations to make sure they can satisfy short-term obligations, may come under less scrutiny as corporations expand. Instead, solvency ratios—which show a company's capacity to pay off long-term debts—and efficiency ratios—which assess how well the company's assets are being used—are more appropriate. Moreover, for behemoths in the industry, investor-focused ratios like earnings per share (EPS) or price-to-earnings (P/E) ratios can become more pivotal, as they directly influence stock prices and investor sentiments. It's also worth noting that as companies mature, the interpretation of these ratios can shift. A ratio that once indicated growth potential in a smaller company might, in a larger context, reflect stability or market dominance. Thus, the relative importance and interpretation of financial ratios evolve in tandem with the company's growth and market position.